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Sunday, February 03, 2008

Why equities should go down

I'm breaking radio silence because of a brilliantly lucid article (from the subscription-only Barron's site) found for us by Michael Panzner.

Vitaliy Katsenelson explains that the current average price-earnings ratio may seem cheap, but that's because recent profit margins have been well above the 8.5% trend. Even allowing for a shift since 1980 away from industry towards the higher-margin service sector, the present 11.9% profit margin should be seen against a longer-term background figure of around 8.9 - 9.2%, which if current p/e ratios continue would imply a downward stock price correction of 22 -25%.

This chimes with Robert McHugh's "Dow 9,000" prediction from last July. And in many fields it's usual for overshoot to occur in the process of regression to a mean, so if it holds true in this case we could see even deeper temporary lows.

Day traders, be warned: this piste is a Black Run.


James Higham said...

Knew you wouldn't be able to resist it.

Nick Drew said...

Newmania will be back soon as well, no doubt !

anyway, thanks for posting again, I shall have to add you back into the daily routine ...

hatfield girl said...

You're back with more bad news; wonderful.

Sackerson said...

Hi HG: It's not bad news to warn the captain of submerged rocks ahead - the intention is sunny, even if the information is sometimes dark.